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Brand Loyalty, Generic Entry and Price Competition in Pharmaceuticals in the Quarter Century After the 1984 Waxman-Hatch Legislation

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  • Ernst R. Berndt
  • Murray L. Aitken

Abstract

The landmark Waxman-Hatch Act of 1984 represented a "grand compromise" legislation that sought to balance incentives for innovation by establishing finite periods of market exclusivity yet simultaneously providing access to lower cost generics expeditiously following patent expiration. Here we examine trends in the first quarter century since passage of the legislation, building on earlier work by Grabowski and Vernon [1992,1996] and Cook [1998]. The generic share of retail prescriptions in the U.S. has grown from 18.6% in 1984 to 74.5% in 2009, with a notable acceleration in recent years. This increase reflects increases in both the share of the total market potentially accessible by generics, and the generic efficiency rate - the latter frequently approaching 100%. Whereas in 1994, the generic price index fell from 100 to 80 in the 12 months following initial generic entry and by 24 months to 65, in 2009 the comparable generic price indexes are 68 and 27, respectively. Recent studies sponsored by the American Association of Retired Persons focus only on brand prices and ignore substitution to lower priced options following loss of patent protection. For the prescription drugs most commonly used by beneficiaries in Medicare Part D, the average price per prescription declined by 21.3% from 2006 to 2009, rather than increasing by 25-28% as reported by the AARP. Finally, we quantify changes over time in the average daily cost of pharmaceutical treatment in nine major therapy areas, encompassing the entire set of molecules within each therapy class, not simply the molecule whose patent has expired. Across all nine therapeutic areas, at 24 months post-generic entry, the weighted mean reduction in pharmaceutical treatment cost per patient is 35.1%.

Suggested Citation

  • Ernst R. Berndt & Murray L. Aitken, 2010. "Brand Loyalty, Generic Entry and Price Competition in Pharmaceuticals in the Quarter Century After the 1984 Waxman-Hatch Legislation," NBER Working Papers 16431, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16431 Note: HC IO PR
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    1. Berndt, Ernst R. & Cutler, David M. & Frank, Richard G. & Griliches, Zvi & Newhouse, Joseph P. & Triplett, Jack E., 2000. "Medical care prices and output," Handbook of Health Economics,in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 3, pages 119-180 Elsevier.
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    Cited by:

    1. Lee Branstetter & Chirantan Chatterjee & Matthew J. Higgins, 2014. "Starving (or Fattening) the Golden Goose?: Generic Entry and the Incentives for Early-Stage Pharmaceutical Innovation," NBER Working Papers 20532, National Bureau of Economic Research, Inc.
    2. Alpert, Abby & Duggan, Mark & Hellerstein, Judith K., 2013. "Perverse reverse price competition: Average wholesale prices and Medicaid pharmaceutical spending," Journal of Public Economics, Elsevier, vol. 108(C), pages 44-62.
    3. Patricia M. Danzon & Michael F. Furukawa, 2011. "Cross-National Evidence on Generic Pharmaceuticals: Pharmacy vs. Physician-Driven Markets," NBER Working Papers 17226, National Bureau of Economic Research, Inc.
    4. Costa-Font, Joan & McGuire, Alistair & Varol, Nebibe, 2014. "Price regulation and relative delays in generic drug adoption," Journal of Health Economics, Elsevier, vol. 38(C), pages 1-9.
    5. Lee G. Branstetter & Chirantan Chatterjee & Matthew Higgins, 2011. "Regulation and Welfare: Evidence from Paragraph IV Generic Entry in the Pharmaceutical Industry," NBER Working Papers 17188, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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